Memories of a Reserve Currency Collapse

Penang Monthly

By N. Balakrishnan

If the history of global capitalism is anything to go by, massive social unrest can be only one financial event away.


Mobs attempting to overturn a bus.

As the ringgit tests multi-year lows and I hear people talk about the coming collapse of the US dollar as the world’s reserve currency, I look back to my time in Penang in 1967 when I witnessed first hand the severe social consequences that a sudden collapse in a reserve currency can bring.

Malaysia in November 1967 was just about four years old – though it had existed as independent “Malaya” since 1957. The country had a currency board system with the Malaysian dollar backed by the British pound sterling which then was in widespread use in former British colonies.

The Malaysian government was in the process of issuing its own currency backed by its own Central Bank to replace the currency issued by the Board of Commissioners of Currency of Malaya and North Borneo set up in 1938 and backed by the sterling. This Currency Board system had been able to provide a level of monetary stability and prosperity to Malaysia, Singapore and Brunei which other Asian countries – including giants such as China and India – could not even dream of.

In June 1967 the Malaysian dollar, issued by the new central bank, Bank Negara Malaysia, replaced the Malaya and British Borneo dollar at par and both currencies were allowed to circulate, with the Board’s currency backed exclusively by sterling and the Malaysian dollar by the Malaysian Central Bank. The plan was to withdraw the Board’s currency eventually, but no one was in a hurry to do that, what more with a currency note backed by the mighty sterling of a former colonial power.

But then came November 1967. Five months after the introduction of the Malaysian dollar, the pound was suddenly devalued by 14.3%. The new currency issued by Malaysia was not affected but the Malayan and British Borneo dollar were still pegged at 8.57 dollars per pound, and these reduced in value overnight by 15%. Since the devaluation of the sterling was unexpected and even the Malaysian government was not told about it by the UK, Malaysia found itself in a strange situation with two currency notes in circulation as legal tender – and one worth 15% less than the other! Malaysia’s then-Finance Minister was the capable Tun Tan Siew Sin, who definitely could not be blamed for not anticipating this turn of events.

The irony was that many Malaysians, conditioned to think of Britain as a strong power and to be sceptical of the financial abilities of fledgling states like their own, had been storing up on the “old British” notes. Malaysia at that time was underbanked, and most people, especially the poorer ones, literally kept their savings in large denomination notes under their mattresses.

Their savings suddenly lost value and, naturally, they were deeply angered.

Malaysia in those days had legitimate socialist parties such as the Socialist Front, which had deep support from smaller businessmen and workers. Huge demonstrations were organised asking for the government to offer compensation to holders of the old notes. The demonstrators had a point, since the government had told the public not to rush to the banks to convert to new notes and that both currencies were backed by the government equally. No one was in the mood to listen to the arcane explanations of the government about how the notes were actually backed differently.

The Socialist Front was particularly strong in George Town at that time, and had elected Members of Parliament and a good political infrastructure.

Unsurprisingly in a nascent post-colonial nation with large ethnic ghettoes, the anti-government demonstrations soon took on a racial dimension. Dozens of people were killed and a curfew was imposed for several days.

Though Indian, my family lived on Lebuh Cina, which was populated mostly by the Chinese. It was not far from where many inter-ethnic clashes took place between marauding youths from all ethnic groups. In my mind, I can today still sense the acrid smell of tear gas coming from canisters that the passing police vans threw – to our eyes, rather randomly and callously – along the streets.


The use of tear gas to disperse the mobs.


The deserted streets of the once-holiday island of Penang.

It was also the first time and fortunately only time I saw men being knifed and blood running in the streets. The victims were unlucky, being of the wrong ethnic group in the wrong place at the wrong time. Eventually the situation returned to normal but two years later in May 1969, more interethnic clashes broke out, this time largely in KL following a bad showing by the ruling Alliance coalition.

But it was the 1967 riots and killings in Penang that left a deep impression. I was too young to understand the economic and monetary dimensions of it. Those revelations came to me later, in 1980 when I was working as a rookie reporter for a news agency based at the World Trade Center in New York. Cigar-chomping Paul Volcker was in charge of the Federal Reserve then. The prime interest rates were in the high teens, and the gold price was rising rapidly. In fact, the Aden Sisters, based in Costa Rica, were predicting that the gold price would reach US$5,000 an ounce.

The markets and the market gurus of that time were fixated on the narrow money supply – “M-1B” – and were watching it diligently. If it went up, then the high interest rates were there to stay, and if it went down then there was hope for lower rates. Despite some economic training from a very good American college, it was a shock for me to see billions changing hands on the basis of this one number!

Those were pre-Internet days and I was the youngest of half a dozen reporters invited to the briefing every Friday afternoon at in the New York Federal Reserve on Liberty Street. The numbers were released to us at 4pm but we were only allowed to use the fixed line phone to call our offices at 4.10pm. So for a precious ten minutes, I was in possession of a number that could have made a lot of money for anyone who knew them in advance!

The Federal Reserve briefings went on for about 30 minutes, detailing “wire problems” and various problems afflicting the US banking system. Any faith I had that bankers and banks knew what they were doing with all that money evaporated then. I also have fond memories of the fluffy folded hand towels that adorned the men’s room at the New York Fed. I doubt whether there were women’s rooms then, and if there were, whether they had fluffy towels in them.

But the expected Weimar Republic of America scenario never happened, and the conservatives in America triumphed in convincing the populace to swallow immediate sharp pain for the long-term good. Today, the Liberty Street crowd seems instead to want the Federal Reserve to not only increase the money supply but print more and more money to make the markets go up. Some are even proposing negative interest rates!

Is this a new era where lax money does not matter anymore, or is it just the calm before the storm? Will what happened in Penang in 1967 happen on a global scale soon, with the masses taking to the streets when they finally realise that the “currency” in their pockets is not worth what they were told? Having seen how sudden changes can come about in 1967 Penang and 2008 New York, I am no longer reassured by “expert” assurances that things are all right on the monetary front.

N. Balakrishnan is an entrepreneur with diverse interests who has been based in Hong Kong for more than 20 years. He grew up in Penang and attended Penang Free School. More information about him can be found at


Penang’s forgotten protest – The 1967 Hartal

For almost two months in 1967, Penang erupted in violence and bloodshed. To many, the incident has been largely forgotten, but what inspired the 1967 Hartal, and how did it descend to chaos?




Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s